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As living expenses continue to rise, Canadian retirees are increasingly seeking ways to enhance the returns on their hard-earned savings. A favored approach is to invest in high-yield dividend stocks within a self-directed Tax-Free Savings Account (TFSA).
Financial Pressures on Retirees
While government and defined-benefit pensions are adjusted for average inflation, these adjustments may not align with the actual cost increases experienced by many retirees. Rising costs for rent, mortgages, insurance, property taxes, and energy are straining retirement budgets.
Some retirees are opting for part-time work to manage additional expenses, but this can jeopardize Old Age Security (OAS) pensions if their net world income surpasses the threshold. For the 2024 income year, this threshold is set at $90,997. Though this might seem like ample income, substantial taxation by the Canada Revenue Agency (CRA) can leave retirees with tight budgets, particularly if they are managing debt.
The OAS recovery tax deducts 15 cents for every dollar earned above the threshold. For instance, a retiree with a net world income of $100,997 in 2024 would face a $1,500 reduction in their OAS payments for the period from July 2025 to June 2026. This reduction can significantly impact those already managing a tight financial situation.
Advantages of TFSA Investments
Investing in income-generating assets within a TFSA provides tax-free passive income and avoids affecting OAS eligibility. For those who prefer lower risk, Guaranteed Investment Certificates (GICs) are an option, offering rates between 4-5% on non-cashable GICs despite lower rates compared to the previous year.
Dividend stocks, which have recently become more affordable, often offer yields surpassing those of GICs. While stock prices can fluctuate and may fall below the purchase price, the potential for dividend growth can enhance the yield over time. Historically, companies with a strong track record of increasing dividends are considered reliable choices.
Enbridge (TSX:ENB) is an example of a stock with a long history of dividend growth, having increased its dividend annually for 29 years. Enbridge continues to expand through acquisitions and capital projects, forecasting a 3% annual increase in distributable cash flow in the coming years, which supports consistent dividend growth. Currently trading around $49.50, the stock has potential for appreciation from its 12-month low of approximately $43. Enbridge’s yield stands at 7.4%, with further upside expected as U.S. interest rates decline from their previous highs.
TC Energy (TSX:TRP) is another strong contender in the energy sector, noted for its reliable dividend increases over the past 24 years. The company anticipates a 3-5% annual growth in dividends. TC Energy has made significant progress in strengthening its balance sheet, despite the cost overruns of its Coastal GasLink project, which is set to begin commercial operations in 2025. The stock, which fell from $74 in 2022 to about $44 last year, has rebounded to $55. With a yield of around 7% and potential for further appreciation as interest rates decrease, TC Energy represents a solid investment opportunity.
For retirees looking to bolster their savings while managing inflation and living costs, these high-yield dividend stocks offer a promising strategy to achieve stable and tax-advantaged income.
